Taxation On The Sale Of A Home

For most of us, our home represents our largest asset. Over time, the management
of this asset can make a big difference in our overall financial outlook. One
of the largest planning opportunities home ownership brings is the favorable tax
treatment afforded the sale of a primary residence.

Home Sale as Capital Gain

The gain on the sale of a home is considered a gain on the sale of a capital asset.
Any taxable profit you make is subject to a maximum long-term capital gain rate
of 15% (5% for gains in the 10% to 15% federal income tax brackets) if you owned
the house for more than 12 months. Gain on the sale of a home may only be taxable
to the extent it exceeds $250,000 ($500,000 for joint filers) if certain conditions
discussed below are met.

To determine your profit (gain), you subtract your basis from the sale price
minus all costs and commissions. For instance, if you sell a house for $250,000,
and must pay your broker 6% of the sale price -- or $15,000 -- your sale price
for determining capital gain tax is $235,000 ($250,000 minus $15,000).

Say you bought that house 20 years ago, for $35,000. You have since redone
the kitchen and bathrooms, put in new windows, added a bedroom, and a new roof.
Your basis in the house is $35,000 plus the cost of all of the capital improvements
you have made, providing you have paperwork to verify the costs. Let's assume
the total cost of those improvements over the 20 years you owned the home is
$40,000. In such a case, your basis would be $75,000. Your capital gain would
be $235,000 minus $75,000, or $160,000. If you are in the 28% federal tax bracket
or higher, your capital gain tax on your home sale would be $32,000 unless you
use the principal residence exclusion.

The Primary Residence Exclusion

A $250,000 exclusion for single filers ($500,000 for joint filers) is now available
to all taxpayers. You can claim the exclusion once every 2 years. To be eligible,
you must have owned the residence and occupied it as a principal residence for
at least 2 of the 5 years before the sale or exchange. If you fail to meet these
requirements by reason of a change in place of employment, health, or other
unforeseen circumstances you can exclude the fraction of the $250,000 ($500,000
if married filing a joint return) equal to the fraction of 2 years that these
requirements are met.

Material discussed is meant for general illustration and/or informational purposes
only and it is not to be construed as tax, legal, or investment advice. Although
the information has been gathered from sources believed to be reliable, please
note that individual situations can vary therefore, the information should be
relied upon when coordinated with individual professional advice.

This web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice. You may wish to consult a competent attorney, tax advisor, or accountant.